Changes on the horizon

Tuesday, 01 December 2009
A discussion on the forthcoming changes to legislation that will affect trustee companies in Australia.

On 6 May 2009, the Exposure Draft of the Corporations Legislation Amendment (Financial Services Modernisation) Bill 2009 (the Bill) was released, which is intended to amend the Corporations Act 2001 (Commonwealth) by inserting a new Chapter 5D therein.

The main objectives of the Bill are to amend the ways in which trustee companies are regulated in Australia. This will be done by ensuring that such companies come under the control of the Commonwealth, as opposed to the individual states and territories (as is the current situation). It will also launch a new system whereby consumers will be better protected via the creation of a national market for trustee services.

Why are the legislative amendments needed in Australia?

The regulation of trustee companies in Australia is not uniform between each state and territory. Each jurisdiction has its own licensing, reporting and supervisory regime, which ultimately has a negative impact on the competition for trustee services within the Australian marketplace.

Furthermore, the current regime offers limited options to beneficiaries who may require dispute resolution services outside of those available by the trustee companies themselves. At present, beneficiaries who may have concerns about the way in which a trustee company is handling the management or administration of a trust or estate in which they have an interest, (after exhausting all internal dispute resolution options with the trustee company) must suffer the financial burden and time delays of applying to the Supreme Court in the appropriate state or territory to have their complaint dealt with.

Another reason for the introduction of this new legislation is to deal with the inadequacy in ongoing government supervision and regulation currently faced by trustee companies in Australia.

Important features of the new legislation

The Commentary to the Exposure Draft (at page 29) of the Bill summarises the important features of the new legislation as follows:

‘The new legislation will:

  • empower trustee companies to provide ‘traditional trustee company services’ that may otherwise be provided only by individuals
  • deem ‘traditional trustee company services’ to be financial services for the purposes of the Corporations Act 2001 (Cth)
  • provide that the Australian Securities and Investments Commission (ASIC - the Commonwealth regulator) will regulate trustee companies in the provision of these traditional services
  • apply the consumer protection (licensing, conduct, disclosure, advice and dispute resolution) provisions of the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth), as modified
  • regulate the fees that trustee companies may charge, and how those fees are disclosed
  • prohibit a company that is not a trustee company from providing traditional trustee company services.’

What is a ‘traditional trustee company service?’

The Bill only proposes to regulate the provision of ‘traditional trustee company services.’ They are listed in the Bill to include:

  • preparing a will, a trust instrument, a power of attorney or an agency arrangement
  • performing estate management functions, which include acting as:
    • a trustee of any kind or otherwise administering or managing a trust
    • an executor or administrator of a deceased estate
    • an agent, attorney or nominee
    • a manager or administrator of the estate of an individual who lacks the capacity to manage his or her affairs
    • a financial guardian of the estate of a minor, or
    • a receiver or custodian of property of a person
  • applying for probate of a will, applying for grant of letters of administration, or electing to administer a deceased estate, and
  • establishing and operating common funds’ (section 601RAC of the Bill).

The types of services which are not covered by the Bill include:

  • acting as a superannuation trustee or a responsible entity for managed funds
  • acting as a debenture trustee, and
  • providing a custodial or depository service.

These services will continue to be regulated under the Superannuation Industry (Supervision) Act 1993 (Cth), the Managed Investments Act 1998 (Cth) and the current sections of the Corporations Act 2001 (Cth) – see page 28 of the Commentary to the Bill.

Regulation of fees charged by licensed trustee companies

As previously explained, the Bill only regulates traditional trustee company services. As a consequence, the Bill is limited to regulating those fees that trustee companies are able to charge their clients for such services.

The Commentary to the Exposure Draft at page 42 states that:

‘The general approach to the regulation of fees includes:

  • disclosure of fees for all work which may be performed (fees include remuneration/commissions)
  • deregulation of the fees charged to new trusts and estates (other than charitable trusts), subject to a requirement that the company’s fee schedule be disclosed on the Internet and a requirement that trustee companies charge no more than the fees specified in their published fee schedule at the time they begin administration
  • in relation to charitable trusts:
    • ‘grandfathering’ of fees charged to existing clients
    • capping of fees charged to new clients
  • The government is committed to a review of the fee arrangements in relation to charitable trusts after two years of operation.’

It is important to note that a trustee company must ensure that an up-to-date schedule of its fees for traditional trustee services is only disclosed on a website maintained by, or on behalf of, the trustee company. Any changes in fees must be disclosed to its clients within 21 days of the change taking effect.

For fees relating to estates and trusts (excluding charitable trusts), the trustee company must not charge fees in excess of its recently published schedule. However, the parties are able to negotiate a different fee (either higher or lower) to that contained in the trustee company’s most recently published schedule.

With respect to estate management services, the Bill allows a licensed trustee company the flexibility to draw its fees from both the income and capital of the relevant estate (however, this does not apply to the annual management fee or to the common fund administration fee for new charitable trusts, which can only come from income).

For services provided to new charitable trusts (i.e. for services provided after this section commences), a licensed trustee company can charge its fees in two ways:

  1. it can charge a management fee.
  2. it can charge a capital commission and an income commission; or

Under the first option, the capital commission cannot exceed 5.5 per cent (Goods and Services Tax (GST) inclusive) of the gross value of the trust assets (‘gross value of the trust assets’ is not defined). The annual income commission charged by the licensed trustee company cannot exceed 6.6 per cent (GST inclusive) of the income received on trust assets.

Under the second option, the annual management fee must not exceed 1.056 per cent (GST inclusive) of the gross value of the trust assets.

For services provided to existing charitable trusts, the Bill ‘grandfathers’ these fees and those clients will be unaffected by the new rules. However, if the charitable trust invests in common fund assets, the licensed trustee company may charge an annual administration fee not exceeding 1.1 per cent of the gross value of the trust assets (for a full summary of fees, see Part 5D.3 of the Bill).

What other regulatory requirements under the Bill will affect trustee companies?

The Bill proposes to align the provision of traditional trustee company services with the provision of ‘financial services’, as currently defined in Chapter 7 of the Corporations Act 2001 (Cth).

This means that trustee companies must be licensed by ASIC and will be required to hold an Australian financial services licence (AFSL), which specifically covers the provision of traditional trustee company services. Furthermore, under the new legislation, ASIC can only give a licence to a trustee company if it provides all, and not only some, traditional trustee company services. Trustee companies that do not presently hold an AFSL will need to apply for one. Trustee companies that already hold an AFSL for other purposes will need to review their circumstances to ensure that they meet their obligations as AFSL holders with regard to the provision of traditional trustee company services (refer to Part 5D.1 of the Bill).

Duties of officers and employees of licensed trustee companies

Once licensed, the officers of trustee companies will be expected to carry out the duties of ‘loyalty and good faith’ and the duties of ‘care, skill and diligence.’ The Bill also imposes a negative duty on employees of trustee companies to avoid conflicts of interest (see Part 5D.4 of the Bill).

Contravention of these duties may result in both civil and criminal penalties.

Limit on control of licensed trustee companies

Consistent with the current system across many Australian states and territories, the Bill also places ownership restrictions on trustee companies. The voting power of any one person in a trustee company will be limited to 15 per cent (section 601VAA of the Bill). Only the minister is able to approve a higher shareholding where necessary (section 601VBB of the Bill).

Cancellation of Australian Financial Services Licence (AFSL)

ASIC is able to cancel the AFSL held by a trustee company. This may be problematic for clients as they may be left without an entity to manage the estate or trust in which they have an interest. The Bill proposes to address this issue by stipulating the procedures for the ‘transfer of estate assets and liabilities from the former licensed trustee company to another licensed trustee company’ (section 601WBA of the Bill).

Commencement and transitional provisions

The proposed Bill commences on a date to be fixed by proclamation. The Corporations Act 2001 (Cth) will apply to trustee companies within six months from the day the new Act receives Royal Assent.

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Ivana Bosio

Ivana Bosio TEP is a Technical Manager for Wills at Australian Executor Trustees Limited

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